Justia Corporate Compliance Opinion Summaries

Plaintiff was employed through various foreign subsidiaries of Morgan Stanely between 2006 and 2016. Plaintiff claims that, between 2014 and 2016, he raised concerns about U.S. securities violations, which occurred overseas but affected U.S. markets. After receiving a pay cut and a recommendation that he find employment elsewhere. In January 2016, Plaintiff resigned. Plaintiff then hired counsel. However, counsel withdrew after Morgan Stanley threatened to pursue an action against counsel for violations of his professional obligations.The Department of Labor Administrative Review Board dismissed Plaintiff's claim under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes–Oxley Act, finding that Section 806 did not apply because he was not an "employee" at the time of any alleged retaliation. The D.C. Circuit affirmed, finding that Plaintiff did not meet the definition of "employee" at any time during the alleged retaliation. View "Christopher Garvey v. Administrative Review Board" on Justia Law

Iris, incorporated in 1999, went public in 2007. In 2019, the SEC revoked the registration of Iris’s securities. Since its incorporation, Chin has been chairman of Iris’s three-member board of directors, its president, secretary, CEO, CFO, and majority shareholder. Chin’s sister was also a board member. Farnum was a board member, 2003-2014, and owned eight percent of Iris’s stock. In 2014, Farnum requested inspection of corporate minutes, documents relating to the acquisition of Iris’s subsidiary, and cash flow statements, then, in his capacity as a board member and shareholder, sought a writ of mandate. Before the hearing on Farnum’s petition, Farnum was voted off Iris’s board. The court denied Farnum’s petition (Corporations Code 1602) because Farnum no longer had standing to inspect corporate records due to his ejection from the board, and his request was “overbroad and lack[ed] a statement of purpose reasonably related to his interests as a shareholder.”Weeks later, Farnum served 31 inspection requests on Iris and subsequently filed another mandamus petition. The superior court denied the petition and Farnum’s associated request for attorney fees. On remand with respect to certain records, Farnum sought reimbursement of his expenses in enforcing his rights as a shareholder ($91,000). The court of appeal affirmed the denial of the request. Farnum scored “only a partial victory” given the scope of what he sought; there was no showing that on the whole, Iris acted without justification in refusing Farnum’s inspection demands. View "Farnum v. Iris Biotechnologies Inc." on Justia Law

A client who retained Plaintiff, the Law Corporation, to represent him in a marital dissolution action. The client assigned the judgments to Musick Peeler & Garrett LLC (Musick Peeler). In October 2019, the Law Corporation filed a motion (the setoff motion) in the superior court to set off against its judgment debt to Musick Peeler a debt that Dougherty allegedly owes to the Law Corporation. The client’s alleged tortious actions to hinder, delay, or defraud the Law Corporation in its efforts to collect on a 1999 default judgment prior to our opinion vacating that judgment and declaring it void in 2009. The trial court denied the motion and the Law Corporation appealed.   The Second Appellate District affirmed. The court explained that to the extent the Law Corporation incurred any fees or costs in connection with its defense against the collateral attack actions in California, they were incurred in defending actions by the client, not a third person. These actions, therefore, do not support a setoff claim based on the tort of another doctrine. Further, even if the Law Corporation’s motion was procedurally proper, the Law Corporation failed to support its setoff claims with relevant evidence and, therefore, the court did not abuse its discretion in denying the motion. View "Karton v. Musick, Peeler, Garrett LLP" on Justia Law

A corporate shareholder alleged the corporation violated his statutory right to inspect certain records and documents. The superior court found that the shareholder did not assert a proper purpose in his request. The shareholder appealed, arguing the superior court erred by finding his inspection request stated an improper purpose, sanctioning him for failing to appear for his deposition, and violating his rights to due process and equal protection by being biased against him. After review, the Alaska Supreme Court reversed the superior court’s order finding that the shareholder did not have a proper purpose when he requested the information at issue from the corporation, but it affirmed the superior court’s discovery sanctions. View "Pederson v. Arctic Slope Regional Corporation" on Justia Law

ZF Micro Solutions, Inc., the successor of now deceased ZF Micro Devices, Inc., alleged TAT Capital Partners, Ltd., murdered its predecessor by inserting a board member who poisoned it. The trial court decided the claim for breach of TAT’s fiduciary duty as a director was equitable rather than legal and, after a court trial, entered judgment for TAT. ZF Micro Solutions argued this was error. The Court of Appeal agreed, holding that while examining the performance of a board member’s fiduciary duties would be required, resolution of this claim did not implicate the powers of equity, and it should have been tried as a matter at law. Judgment was reversed and the matter remanded for further proceedings. View "ZF Micro Solutions, Inc. v. TAT Capital Partners, Ltd." on Justia Law

Armbruster, a CPA with experience working at a Big Four accounting firm, began serving as the controller for Roadrunner's predecessor in 1990 and became Roadrunner’s CFO. Roadrunner grew rapidly, acquiring transportation companies and going public in 2010. In 2014, Roadrunner’s then‐controller recognized shortcomings in a subsidiary's (Morgan) accounting and began investigating. In 2016, many deficiencies in Morgan’s accounting remained unresolved. The departing controller found that Morgan had inflated its balance sheet by at least $2 million and perhaps as much as $4–5 million. Armbruster filed Roadrunner's 2016 third quarter SEC Form 10‐Q with no adjustments of the carrying values of Morgan balance sheet items and including other misstatements. Roadrunner’s CEO learned of the misstatements and informed Roadrunner’s Board of Directors. Roadrunner informed its independent auditor. Roadrunner’s share price dropped significantly. Roadrunner filed restated financial statements, reporting a decrease of approximately $66.5 million in net income over the misstated periods.Criminal charges were brought against Armbruster and two former departmental controllers. A mixed verdict acquitted the departmental controllers on all counts but convicted Armbruster on four of 11 charges for knowingly falsifying Roadrunner‘s accounting records by materially misstating the carrying values of Morgan's receivable and prepaid taxes account, 15 U.S.C. 78m(b)(2), (5), i78ff(a), 18 U.S.C. 2, fraudulently influencing Roadrunner’s external auditor, and filing fraudulent SEC financial statements, 18 U.S.C.1348. The Seventh Circuit affirmed. While the case against Armbruster may not have been open‐and‐shut, a rational jury could have concluded that the government presented enough evidence to support the guilty verdicts. View "United States v. Armbruster" on Justia Law

The United States sued Honeywell International Inc. for providing the material in allegedly defective bulletproof vests sold to or paid for by the government. Among other relief, the government sought treble damages for the cost of the vests. It has already settled with the other companies involved, and Honeywell seeks a pro tanto, dollar for dollar, credit against its common damages liability equal to those settlements. For its part, the government argues Honeywell should still have to pay its proportionate share of damages regardless of the amount of the settlements with other companies. The district court adopted the proportionate share rule but certified the question for interlocutory review under 28 U.S.C. Section 1292(b).   The DC Circuit reversed the district court’s ruling and held the pro tanto rule is the appropriate approach to calculating settlement credits under the False Claims Act. The court explained that in the False Claims Act, Congress created a vital mechanism for the federal government to protect itself against fraudulent claims. The FCA, however, provides no rule for allocating settlement credits among joint fraudsters. Because the FCA guards the federal government’s vital pecuniary interests, and because state courts widely diverge over the correct rule for settlement offsets, the court found it appropriate to establish a federal common law rule. The pro tanto rule best fits with the FCA and the joint and several liability applied to FCA claims. Thus, Honeywell is entitled to offset its common damages in the amount of the government’s settlements from the other parties. View "USA v. Honeywell International, Inc." on Justia Law

Plaintiff initiated an action for involuntary dissolution of R. R. Crane Investment Corporation, Inc. (R. R. Crane), a family-owned investment business that he shared with his brother. To avoid corporate dissolution, the brother and R. R. Crane invoked the statutory appraisal and buyout provisions of the Corporations Code.1 In December of 2020, after a prolonged appraisal process, the trial court confirmed the fair value of Plaintiff’s shares at over $6.1 million, valued as of November 13, 2017, the date Plaintiff filed for dissolution.   On appeal, Plaintiff contends the trial court erred by failing to award him prejudgment interest on the valuation of his shares. He argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The Second Appellate District disagreed and affirmed the trial court’s ruling. The court held that it disagrees that prejudgment interest must be added to the appraised value of Plaintiff’s shares.   The court explained that a plaintiff’s entitlement to prejudgment interest pursuant to Civil Code section 3287, subdivision (a), does not apply to a buyout of shares under Corporations Code section 2000. Further, the court wrote that Plaintiff’s alternative contention that he is entitled to prejudgment interest under Civil Code section 3288also fails. The trial court correctly applied the plain language of Civil Code section 3288 and concluded that the valuation award “is not based on the breach of an obligation not arising from contract or a showing of oppression, fraud, or malice.” View "Crane v. R. R. Crane Investment Corp., Inc." on Justia Law

Attorneys Blume, Cozen, and Madonia were involved in the sale to The Institutes of LLCs owned by the Shareholders. Blume also served on the board of directors and as General Counsel for one of the LLCs, assisting the Shareholders in making business decisions. Unbeknownst to the Shareholders, Cozen represented The Institutes in several matters, including negotiating the price for their transaction. After the deal closed, the Shareholders allegedly determined that they had sold the LLCs at a price substantially below their fair market value and that the attorneys had wrongfully secured a favorable outcome for The Institutes by using confidential client information.Shareholder Potter sued in the Shareholders' names, claiming breach of fiduciary duty and professional malpractice, although he identified the harm as “the difference in the true value of the [LLCs] and the purchase price” that was to be paid to the LLCs themselves. The lawyers argued that under the “shareholder standing rule,” the individuals did not have the legal right to bring the entities' claims in their own names. The district court dismissed the complaint for lack of jurisdiction, stating that the Shareholders “lack[ed] Article III standing." The Third Circuit vacated. The third-party standing rule is merely prudential, not constitutional and jurisdictional, and is properly considered under Rule 12(b)(6), not Rule 12(b)(1). There are different considerations in deciding a motion to dismiss under Rule 12(b)(6) that could produce a different outcome in this case. View "Potter v. Cozen & O'Connor" on Justia Law

An objector appealed a Delaware Court of Chancery decision approving a litigation settlement for claims alleging excessive non-employee director compensation. Initially, the parties agreed to a preliminary settlement and presented it to the Court of Chancery for approval. The Court of Chancery sided with the objector and refused to approve a non-monetary settlement of the derivative claims. The court also awarded the objector fees. After the court denied a motion to dismiss, the parties came up with a new settlement that included a financial benefit to the corporation. The objector renewed his objection, this time arguing that the new settlement improperly released future claims challenging compensation awards and that the plaintiff was not an adequate representative for the corporation’s interests. The Court of Chancery approved the new settlement and refused to award the objector additional attorneys’ fees. On appeal to the Delaware Supreme Court, the objector argued the court erred by: (1) approving an overbroad release; (2) approving the settlement without finding that the plaintiff was an adequate representative of the corporation’s interests; and (3) reducing the objector’s fee because the court believed it would have rejected the original settlement agreement without the objection. Though the Supreme Court acknowledged the Court of Chancery and the parties worked diligently to bring this dispute to a close, it reversed the judgment because the settlement agreement released future claims arising out of, or contemplated by, the settlement itself instead of releasing liability for the claims brought in the litigation. View "Griffith v. Stein" on Justia Law